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Peru: Inca Gold Still Powers a People (2 of 2)

In many ways, Peru stands as an outlier in Latin America. It never fully embraced the Import Substitution Industrialization (ISI) development model used by its neighbors in the post-war period, except for a short period while it was under military rule in 1968–1980. Even Peru’s military dictatorship was unusual in that it was run by a leftist junta that executed a land reform redistributing agricultural wealth—this at a time when most military governments in Latin America were right-wing–oriented and defending the established owners of land and capital from expropriation.

One risk in Peru is that its political system is arguably less stable than that of most of its neighbors. Although the nation has technically been a democracy since 1980, the constitution is manipulated or ignored for political purposes more frequently than one might think. In 1992, then-president Alberto Fujimori dissolved Peru’s Congress and rewrote the constitution in what Peruvians now refer to as the autogolpe (self-coup). In 2000, he amended the constitution again to allow himself a third term, but later was forced to step down because of a corruption scandal involving electoral manipulation. As a result, there have been only three orderly transfers of power between elected presidents in 30 years, and only one in the last 20, excepting the most recent, whose character has yet to be determined.

The recent elections in Peru resulted in a highly polarized candidate field. In the first round of elections, no candidate won the necessary 50%+1 vote required for outright victory, and the election proceeded to a runoff. However, none of the centrist candidates obtained a high enough percentage to make the runoff election; thus, the second round became a bitter contest between Ollanta Humala on the far left and Keiko Fujimori (daughter of Alberto Fujimori, who is currently serving prison time for corruption) on the far right,. Many Peruvians jokingly described the choice as “deciding between having cancer and a heart attack.”

In June 2011, Humala narrowly won the runoff election, with just 51.5% of the vote. In his runoff campaign, he promised to govern from the center left rather than the far left, which is his traditional party base. He will be sworn in on July 28, 2011.

Making good on that promise is likely to be difficult, given that no party or even coalition has a majority in Congress. Humala will need to court other parties to build the support needed to govern, and in doing so may well lose some support from his base. In the days following his victory, the Lima stock market fell 12% due to investor panic. Some of that panic stemmed directly from fear of his leftist credentials, but some portion may simply reflect increased uncertainty about policy decisions of any sort, given the arithmetic of a divided Congress.

More disturbing is the fact that Alberto Fujimori’s dissolution of the 1992 Congress was widely welcomed in Peru as a move to break congressional impasses similar to what may be in store for this Congress. This pattern in Peru increases the chance that, should governing prove difficult, Peruvians may again be willing to bypass the constitution as a way to resolve political differences.

On the positive side, Humala may be genuine in his intentions to avoid extremism. Other Latin American leftists such as former Brazilian president Lula and Argentina’s Carlos Menem have been able to govern with largely pro-market policies and still keep their left wing mostly intact. In the interval between electoral rounds, Humala traveled to Brazil, ostensibly to learn how the PT government managed to thread a similar needle under Lula’s presidency, and possibly to use this as a model for his own policy.

Also on the positive side, the Peruvian economy is currently enjoying a sunny period of rapid growth and low inflation. A rising tide is lifting nearly all boats in Peru, if unevenly. This gives parties more room to maneuver and compromise. Fears of a renewed 1992 crisis and similar solution are perhaps unfounded.

In general, successful leftist Latin American presidents in recent years have managed their political and economic policies by prioritizing one or two programs that catered to impoverished populations in exchange for promises or guarantees to continue with largely open-trade and open-market policies. As long as Peru’s export markets hold up, striking and maintaining this kind of bargain should be reasonably easy, even if it shaves a small amount off economic growth rates. In addition, given the dramatic disparities of wealth in Peru, a moderately successful antipoverty campaign may unlock new sources of economic growth and political stability.

Although there are reasons to be concerned that Peru’s future growth and performance may not be quite as stellar as they have been in the recent past, the recent panic and market volatility over the presidential election are likely overemphasized. Humala is taking the reigns in an economic upswing. The transfer programs that he is likely to fortify as part of his platform are unlikely to have a major effect on the economy, and he has promised to continue a pro-market integration stance. On economic growth policy, it is reasonable to give him the benefit of the doubt, since the external pressure to make dramatic changes is low.

There is some risk that a slowdown in external economies such as the U.S., Europe, and China could crimp Peru’s growth prospects. However, Peru still has a sizeable domestic sector that it can rely on as a cushion, and the government has substantial foreign reserves that can fuel appropriate countercyclical policies if needed.

For asset markets, volatility is likely to increase over the short term as investors take time to interpret the tone that this political configuration takes. In the short term, markets will chop or even lose value, but thereafter, they are likely to resume growth with a return that reflects the mild increase in risk.

In Part II, Worldview will examine the performance of Peru’s asset markets.